Reference no: EM132593901

Zinn Corporation recently agreed to a union contract provision that guarantees a minimum wage of $1,960 per month to each direct labor employee equivalent to 140 hours of work each month. Currently, 140 employees are covered by this provision. All direct labor employees are paid $14 per hour. Thus, until an employee works 140 hours, the remenuration is a fixed $1,960 per employee each month. Rusty Zinn, the assistant to the accountant was given the task of budgeting for the direct labor cost. Because of the contract provision, Rusty decided that the $274,400 (= 140 × $1,960 per month) should be treated as a fixed monthly cost. Rusty was instructed to calculate each month's budget using the following formula: $274,400 + $9 per direct labor-hour.

Figures for the first three months of the fiscal year are as follows:

                                                                         April                   May               June

Direct labor-hours planned and worked       25,500              38,000        58,000

Direct labor costs budgeted                      $503,900          $616,400     $796,400

Direct labor costs incurred                          $357,000          $532,000    $812,000

Variance                                                   $146,900F           $84,400F   $15,600U

These figures are a source of concern because they show unfavorable variances when production is high, and favorable variances during slow months. The factory manager is certain that this trend does not reflect reality.

Required:

Question 1: Not available in Connect.

Question 2: Develop a formula for direct labor costs more appropriate to the actual cost behavior, then recalculate the variances for April, May, and June.